EghtesadOnline: The central bank will resist attempts to pay the rial equivalent of loans taken from the National Development Fund of Iran in bid to avoid overburdening the bank’s balance sheet by printing money.
“To control the balance sheet and curb inflation, there is no other choice but to resists calls [for withdrawals from the NDFI], despite their urgency… avoiding rial payment for foreign currency borrowed from the NDFI is in line with these efforts,” the CBI boss Abdolnasser Hemmati wrote in a note posted on his social media account.
“There is no doubt that controlling money supply and curbing inflation is fundamental to improving macroeconomic variables,” he wrote.
Hemmati was implicitly addressing complaints by the Health Minister Saeid Namaki over the CBI’s refusal to pay €1 billion from NDFI resources approved earlier to help health authorities fight the coronavirus pandemic.
A few months ago, Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei had authorized the government to withdraw €1 billion from the NDFI to meet the high costs of Covid-19.
Hemmati’s concern is related to CBI’s obligation to purchase foreign currency from NDFI and settle the payment in rials.
Buying NDFI currency is a rather superficial move when in actuality its resources are not accessible due to banking and economic sanctions that make money transfers almost impossible.
As per procedures, the CBI has to pay the government the rial equivalent of the foreign currency and receive the forex in lieu. However, since much of Iran’s currency reserves are blocked overseas and there is no possibility of unfreezing it in the foreseeable future, the CBI has to print money to pay to the government. This effectively means running the CBI printing machines fulltime and expanding the monetary base.